Episode 53: Small biz lending: reaching new heights

Michael Finkelstein enjoys seeing others succeed. When he realized many lenders were staying away from SMBs, he decided to do something. So he started Credit Junction, a data-driven lending business that’s breaking down geographic barriers. Or as he put it, “You’re no longer beholden as a small business owner to the banks within a 50-mile radius.”

On Xero Gravity #53, Michael shines the light on this new source for financing your small business. He shares how asset-based lending means more choices, better information, a rock-solid pricing model, and access to capital anywhere in the world.

Because for this record company owner in a previous life, and a spy novel reader in this one, “It cannot be about the finish line. You must stay true to yourself and appreciate the journey.”

Powerful inspiration for small business owners and entrepreneurs alike.

“You’re no longer beholden as a small business owner to the banks within a 50-mile radius of where you live. You now can access capital anywhere in the world.”

EÜ: Meet Michael Finkelstein. Michael is the founder and CEO of the Credit Junction — a company that focuses on asset-based lending for small businesses.

He brings a wide variety of experience to this conversation, including his former life as the owner of a record company.

When the 2008 financial crisis hit and it got harder and harder for small businesses to get bank loans, Michael knew he wanted to be part of the solution.

Guest soundbite:
“I had run small businesses, I had access to capital, you know, concerns and issues and challenges, and really wanted to be a part of this new wave of lending, this new wave of combining data and technology with a kind of lending criteria. Ours is asset based, and allows small business owners the opportunity, or affording them the opportunity, to really access the capital they need through multiple points, and giving them multiple options.”

EÜ: So we have all of that and more coming up on Xero Gravity, right after this.

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EÜ: Michael Finkelstein, thanks for joining us on Xero Gravity.

MF: Great to be here Elizabeth.

EÜ: What do you get up to in your free time?

MF: I like to use my free time on things that I enjoy most. First, I’m an avid New York sports fan whether it’s baseball, football, basketball, hockey. You know, even when I was young the (New York) Cosmos of soccer and or football overseas, I should say. I also love to kind of box. I don’t spar but I love the circuit. Jumping rope and hitting the heavy bag I think it’s just a great way to spend 45 minutes in totally your own zone. And then for a little more relaxation, I am big reader of spy novels.

EÜ: Oh wow.

MF: Yeah, they recreate a certain time in our country’s history or Europe’s history or another territory’s history. And recreate that time where ordinary individuals are thrust into extraordinary circumstances. And it really shows the testament of what people can do in suboptimal kinds of areas. and the whole notion of espionage and the way it was done in the early days really just fascinates me. So I will sit back and have a glass of wine and read a spy novel, and that’s kind of a perfect way to spend an afternoon.

EÜ: And ordinary people thrust into unusual circumstances — I think that describes a lot of the small business entrepreneur’s experience as well.

MF: Oh it no doubt does. It’s a dream to kind of start a small business, to own a small business. But to fulfill that vision that you had since day one is what I think every small business owner really strives for. And there’s that really intrinsic benefit that people should hopefully get every day when they get out of bed in the morning.

EÜ: So speaking of doing things that you love, I understand that you used to own a record company. So tell us about that?

MF: I did. I ran a record business. A music company and you know, it’s honestly funny Elizabeth. I look back on that experience and I think as small business owners you learn through your failures and your successes. And yes, it was in music, and yes there was a lot of kind of cache to it, quote unquote, but at the end of the day I think one of the things I tried to do was really be in the business of music, versus the music business. I think there’s a lot of similarities across all businesses. But the music business does have its own eccentricities and it was an interesting time in my life. We built a really good business and it ended well in 2012.

EÜ: And so for those of us who know the electronic dance community, you have to tell us how…

MF: Yes.

EÜ: …you know Avicii? Electronic musician and DJ, Avicii?

MF: Oh yes. So before anyone in the US had heard of dance music or heard of David Guetta or heard of the Swedish House Mafia, that was our business. We used to work with DJs around the world and distribute their music and help market their music, and it was a little cottage industry before the explosion of EDM happened and became mainstream really.

So I do know Avicii. I ended up meeting Tim, his real name, in early 2009 I guess, before he exploded on the scene. And he was really a kid out of Sweden and we ended putting out a little compilation that he did for us. And I laugh every time I see him. He deserves it, he’s a great guy and he’s worked extremely hard and he deserves all the success in the world. So I, you know, I like watching people and observing people get what they deserve. And he deserves it all. So I wish him the best. I mean I haven’t spoken to him in four years, but yes, I do know Avicii.

EÜ: What a great story! So what did you study at Cornell, and how did that experience contribute to what you’re doing now?

MF: I went to Cornell and graduated in ’94. And I think I always had the vision of really being a businessman. I studied applied economics and business management at Cornell. I took some liberal arts classes but really the focus was around the start of learning the building blocks to business: the finance, management, marketing, communications, some economics, and really trying to get a wide range of experience and educational experience in and around business. And that led me to kind of work on Wall Street as my first job after that.

EÜ: So Wall Street I’m sure is much different than Cornell. When you were working on Wall Street, what were some of the things that you observed that either inspired you or served as cautionary tales for the rest of your career.

MF: Yeah. I worked for three years after school. Actually, truth be told, I had an unbelievable experience. I was very fortunate to work with a group of people that were really open to training me and my fellow kind of junior analysts. It was tough, there’s no doubt about it, long hours, but I learned a lot. And I think I learned more during that period than I actually gave myself credit for, and I think you get out what you put in, right?

I think going through it, you don’t kind of see that and you’re working long hours and you’re kind of doing numbers and there’s a lot of high pressure what have you, but I think that really kind of gave me a good base to lay the foundation for the Credit Junction.

EÜ: And what were some of those learnings from that time on Wall Street?

MF: So the learnings were a couple of things I think. First, it absolutely is a great training ground to get the basics for finance, accounting, what have you. I think learnings around what drives CEOs and CFOs to make certain decisions. I was fortunate to work on some great deals early on with some great companies. And getting exposure to CEOs and CFOs at a very early age, really, just sitting back and observing the way their thought process kind of went in and out and the kind of decision making that they went through, I know it’s helped me and I’ve called on those experiences in the past.

Obviously the industry went through a lot of consolidation, which people kind of think was the precursor to the crisis of 2007/2008, but there was a lot more fragmentation, and I was at a great firm called Salomon Brothers, which is no longer around. But it was great firm during the day and I think it really gave me perspective, to be perfectly honest, what I didn’t want to do.

EÜ: Ah!

MF: I wanted to be an operator. I loved the enthusiasm and the passion and the commitment to excellence that these CEOs and CFOs had, and I wanted that. And I felt like it’s one of the reasons why I went back to business school. I felt like I had a pretty good background in finance and accounting, but didn’t really understand what it really took to run a business. And, you know, I think the venture back to school and then thereafter kind of put me on that direction.

EÜ: So you got bitten by the entrepreneurial bug.

MF: Oh, I did. And then it started in ‘96/97, but once I hit Stanford in the Silicon Valley during the late 90s, it just went through the roof.

EÜ: So can you share with us some of the challenges that you faced as a small business owner, when you were first starting out?

MF: Ah well, I got a great education at Stanford and was really thrust into that whole entrepreneurial internet V1, where a lot of the great companies today started. And I was fortunate that my first job after business school was working for a very small startup in Los Angeles that had some wonderful people running the company. I was able to take apprenticeship from very experienced, very knowledgeable executive management. And I was able to kind of learn on the fly. And I think, you know, to their credit they really took the time to kind of nurture and culture me in the things that they were doing. And seeing what would take extra time and also gave me more and more responsibility. I mean at this time with my first job out of business school, I was 27/28 being thrust into kind of senior level roles and not knowing anything. I mean not knowing anything!

EÜ: [Laughs]

MF: Yeah, the reality is you can read all the textbooks in the world and you can read the case studies, and I’m an avid reader of individual biographies — I love kind of historical figures — but at the end of the day when you’re actually living and breathing it, it all goes by the wayside. Right?

And at some point you take all those learnings and what I call really, Elizabeth, a heuristic, right? It’s these things that you can’t put on paper, it’s the things that you really can’t explain that actually lead you to make the decisions, right? I mean it’s easy to see numbers on a piece of paper or words on a piece of paper. But to actually make a decision and see the results of that decision, and in some cases the calamity of that decision, it’s striking what happens to you, it kind of leads you down a road that says I’m going to try to make more decisions correctly, but if I don’t, you know what I still have to get up the next day. Because everything you do in a small business doesn’t only affect yourself it affects everyone around.

EÜ: I love that. What an important lesson for our listeners as well. And now it’s time to dig a little deeper into this episode’s theme, which is of course: What are small business loans and how can they take your business to the next level?

So Michael I’d love for you to help us understand how small business loans compare to a “normal loan.” What is a small business loan?

MF: Yeah, so a small business loan in the US is between $50-100,000 up to $5 million. Once you get north of $5 million you really end up in what I call the middle market.

So small business lending has two distinct kind of groups. The first group are companies that need anywhere between $50,000 and call it $250,000, that traditionally are what we call mainstreet. These are great businesses — restaurants, they could be wine stores, they could be barber shops — and these appear countless times across this country in small towns and big towns, in major cities, in smaller cities. And those are run by entrepreneurs and small business owners that traditionally need, less than $250-300,000.

Then you have the next segment of small businesses, which is actually the segment that we serve that are not necessarily what appears on main street, but really appears in industry. These could be suppliers, they can be distributors, they can be manufacturers and traditionally those business are doing a few million dollars a year in sales, upwards of 10, and need a couple million dollars to satisfy a certain problem or buy a new piece of equipment. But really the small business segment to me is two segments. There’s the companies that need up to $250,000 and those that need 250 to 5 million. I think it’s pretty clear to say anything less than kind of $5 million would classify as a small business.

EÜ: So I think this number is a little surprising. For me it seems like $5 million is a pretty big loan. But that’s still considered small business?

MF: You know, it is. And if you were going to look at the federal definition of small business, it’s sub 250 and sub $1 million. That’s really the quote unquote, definition of it.

The small and mid-sized enterprise market is really up to $5 million and you’d be surprised how many small businesses that have 10-15 people have the ability to take on loans of $2 million, $3 million, $4 million, because their business is growing and they have use for that capital. I don’t get tied up into definitions. I really get focused on the use, the kind of business we’re serving, and the use of those funds. And whether that’s $250-300,000 or $2-3 million, I think each business is unique.

EÜ: And clearly you saw that there was a need for small business lending in this space. So what inspired you to start this company?

MF: You know, what inspired me to start this company – it’s a great question Elizabeth. Because I think you know, kind of late 2012 or early 2013,
I became just intellectually fascinated with what was going on in financial services. I think we can all agree Elizabeth, that the world changed after 2008, and that for a variety of reasons, traditional financial institutions were exiting a lot of loan products, and I wanted to be a part of that.

I had run small businesses, I had access to capital, you know, concerns and issues and challenges and really wanted to be a part of this new wave of lending, This new wave of combining data and technology with a kind of lending criteria. Ours is asset based, and allowing small business owners the opportunity or affording them the opportunity to really access the capital they need through multiple points, and giving them multiple options.

I saw that that was about to happen. That doesn’t mean that their banks are completely exiting. They’re refocusing and there’s a time and a place for your traditional financial institution, but we’re also an option, as are a host of other companies. I really wanted to be a part of that new ecosystem that was forming.

EÜ: It’s such a fascinating space. I mean the ecosystem as you mentioned is evolving so rapidly right now, and especially since 2008. So I know that one of the misconceptions around small business lending is that these traditional banks are the ones to go to when they need the type of money that you’re describing. What are some other misconceptions that exist around small business lending?

MF: I think the number one is there are no options. The number one misconception is if I can’t get a loan from a bank, I can’t get a loan and that just simply is not the case today. I think that there are a wealth of options today and I think the biggest that myself and other platforms have is the education side.

The awareness that there are a variety of different ways for you to finance your business, either through traditional means or alternative means. And some of us are right from some businesses and some of us are not, and I think there’s a lot of information out there which lends itself to noise. But also the wealth of options now available to small business owners are larger than they ever have been, and I think through this next wave of data-driven lenders — I like to call them data-driven lenders instead of online — but data-driven lending, which really breaks down geographic boundaries.

So you’re no longer beholden as a small business owner to the banks within a 50-mile radius of where you live. You now can access capital anywhere in the world. And I think that will lend itself to better choices, better information and in the long run, create a pricing model that actually works for your business, whatever that may be. So I think, Elizabeth, the number one misconception is that if I do not get a loan from a bank I do not have an option, and that just simply is not the case today.

EÜ: Well I love how you describe that data is really opening up the range of options and now you can get money from anywhere. But is data really a replacement for the traditional character lending that we’re talking? Or if we look at any of the Cs of lending, whether it’s character, credit conditions, collateral, you know, blah, blah, blah, is data really going to change how lenders look at the overall picture of a company that they’re considering making a loan to?

MF: No. That’s the easy answer. I think the reality is, and we say this all the time here Elizabeth, you lend to a person, you do not lend to a business. And that person is the person that is making the decisions. So to me character is number one on the list.

I think when it comes to data, I think data can really be an addendum to it, it can enhance all those areas. It can enhance credit, it can enhance collateral monitoring, it can enhance all sorts of things such that we do not have a box. We combine data with certain traditional lending metrics to come up with our view of the health of the model, or the health of the applicant. And by the way, data just doesn’t help day one, data after the loan can help.

We can run all sorts of analytics against reporting and how your business is progressing, to help the business owner understand things that maybe he or she didn’t see as they’re in the kind of day to day of it. And so I believe we really are a lender and a partner. And being a partner is really understanding the fact that small business owners go through highs and lows, they go through areas of growth and they go through areas of — hopefully not too many — but times of stagnation.

Creating a capital structure of flexibility that allows small business owners to (a) not worry about capital when times are good, or (b) you know, kind of scale back capital when times are a little tight, to me, is a great partnership. And it’s not just us giving that individual money. And I think that’s really important. We can do a lot more with the availability of data and the ability to take data real time and understand different components of your business in a way that potentially we were not able to in the past.

EÜ: You mentioned that you do asset-based lending. What does that mean for a small business, when might this be appropriate?

MF: Yeah, it’s a good question Elizabeth. So there are cashflow lenders and asset-based lenders. Cashflow lenders are more prevalent and look at the transactions out of your business: what does the income statement show, what kind of cash are you generating, either daily, weekly, monthly. That’s how they evaluate their credit and that’s their credit window if you will. Ours is a little different, or very different I should say. We are a balance sheet lender. What does that mean? We look at items on your balance sheet that generate the assets and the cash in your business.

So, we look at your receivables, we look at inventory, whether that’s finished goods, or working process, or raw materials depending on the kind of business you are. You may be buying goods and re-selling them as a distributor or you may be making goods as a manufacturer and we’ll look at those.

One of the things that the Credit Junction really prides itself on is bringing asset-based lending to the small business world. This was really a key cornerstone of the vision of the company, which was, there are a lot of great businesses out there that could use or benefit from an asset-based lending product, but weren’t afforded that opportunity given the fact that most asset-based lenders won’t lend to quote unquote “the small business,” the person that needs $1 million or $500,000 or even a million and a half.

And our view was given some elegant use of data and technology we believed in – I guess we’re starting to do it – that we could bring that great product to the small business community and it’s been – it’s been very well received.

EÜ: Well Michael, this has been a great conversation. I really appreciate the role that you’re playing in bringing this type of capital to those small businesses that haven’t traditionally had access to this, so thank you so much for what you’re doing. And we’re going to finish up with our question countdown. Five quick questions and five quick answers. Are you ready?

MF: I’m ready, Elizabeth.

EÜ: So what business book or idea made the biggest impact on your life and why?

MF: The Rise of Theodore Roosevelt, by Edmond Morris, because it’s a great profile of a great man.

EÜ: Awesome. What’s the one thing you can’t live without?

MF: Pizza.

EÜ: I just ate a pizza! What’s the most useful app on your phone right now?

MF: Flipboard.

EÜ: In one sentence: what’s the greatest lesson you’ve learned throughout your small business journey?

MF: This is really hard and it cannot be about the finish line. You must stay true to yourself and appreciate and enjoy the journey.

EÜ: And finally, what skill do you want to enhance this year?

MF: Podcast interviews, no!

EÜ: [Laughs]

MF: [Laughs] Every day I want to be a better leader than the last.

EÜ: Well thank you. That’s all we have time for today, Michael. Thanks so much for joining us on the show.

MF: A pleasure, and thanks for the opportunity to speak with you, Elizabeth.

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EÜ: That was Michael Finkelstein, founder and CEO at the Credit Junction. Thanks for listening to Xero Gravity.

Be sure to tune in next Wednesday because we’ll be joined by omni channel expert, Kevin McKeand. He has a few gentle words of inspiration for small business owners, so don’t miss out on that one. We’ll see you then, ciao for now.